(2001) 39 ACSR 265 Reported Decision : (2001) 19 ACLC 1662 [2001] ACL Rep 100 NSW 9 New South Wales Court of Appeal CITATION : Leadenhall Australia Ltd & Ors v Peptech Ltd [2001] NSWCA 272 revised - 24/09/2001 FILE NUMBER(S) : CA 40995/99 HEARING DATE(S) : 1 August 2001 JUDGMENT DATE : 24 September 2001 PARTIES : Leadenhall Australia Limited & Ors - Appellants Peptech Ltd - Respondent JUDGMENT OF : Meagher JA at 1; Handley JA at 18; Giles JA at 19 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT ED (Comm List) 50080/99 FILE NUMBER(S) : LOWER COURT Hunter J JUDICIAL OFFICER : COUNSEL : D J Hammerschlag SC & V Kerr - Appellants S D Robb QC & C Moore - Respondent SOLICITORS : Barker Gosling - Appellants Clayton Utz - Respondent CATCHWORDS : Misleading and deceptive statements - where company failed to disclose existence of restricted shares - where appellants acquired shares and options in respondent in reliance on those statements - quantum of damages - appeal dismissed. D. Corporations Law LEGISLATION CITED : Trade Practices Act 1974 Fair Trading Act 1987 (NSW) Apollo Shower Screens Pty Ltd v Building or Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561; Daniels v Anderson (1995) 37 NSWLR 438; CASES CITED: Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Marks v GIO (1998) 196 CLR 494; Potts v Miller (1940) 64 CLR 282; Sellers v Adelaide Petroleum NL (1994) 179 CLR 332. DECISION : Appeal dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40995/99 ED (Com List) 50080/99 MEAGHER JA HANDLEY JA GILES JA Monday, 24 September 2001 LEADENHALL AUSTRALIA LTD & ORS v PEPTECH LTD FACTS The appellants claimed damages for misleading and deceptive statements made by the respondent in two of its public documents. They alleged breaches of the Corporations Law, the Trade Practices Act 1974 and the Fair Trading Act (NSW). The statements were false and misleading in that they omitted to mention the existence of an amount of restricted shares which would not be available for trading until about 6 September 1997. On 31 July 1997, in reliance on the misleading documents, the first appellant entered an allotment agreement with the respondent whereby the first appellant acquired a fixed number of shares as well as options to acquire further shares in the respondent. On 25 September 1997, the second appellant acquired from the first appellant a number of shares, the third appellant acquired a number of options. The appellant's case at trial and on appeal was that if they had known of the existence of the restricted shares before 31 July 1997 they would have terminated negotiations, or if they had found out shortly after that they would have rescinded the transaction. The trial Judge found that Mr L, who controlled the appellant companies, would not have abandoned negotiations but that an allotment agreement, possibly of a modified form, would have been negotiated; that there may have been a reduced consideration but that any reduction would not have been significant; and that the decline in the share price of the respondent could not be attributed to the release of the restricted shares, therefore the losses sustained by the appellants would have ensured regardless of the existence of those shares. HELD per Meagher JA (Handley JA agreeing) & Giles JA: (i) The submission that the appellants would have terminated negotiations or rescind the agreement if they had knowledge of the restricted shares is contrary to the evidence on behalf of the appellants. Mr L said that had he had found out he would have waited, not that he would have walked away from the transaction. The trial Judge did not fall into error. Per Meagher JA (Handley JA agreeing): (ii) The appellants gave no evidence as to the details of what if any alternative agreement they would have entered. If a plaintiff asks a court to award him damages he must lead evidence as to the quantum of those damages. Per Giles JA: The trial judge correctly saw the case as a different transaction case. In order to establish the suffering of loss or damage it was necessary to determine what different transaction would have been entered into and then compare the position in which the appellants would have been with the position in which they in fact came to be. It was incumbent on the appellants to lead evidence on which that exercise could be carried out. Per Giles JA: (iii) In finding that if a different transaction had been entered into there would have been no significant reduction in consideration, the trial judge meant that the reduction would not have been of sufficient materiality to warrant compensation. ORDERS 1. Appeal dismissed with costs. _________________ IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40995/99 ED (Com List) 50080/99 MEAGHER JA HANDLEY JA GILES JA Monday, 24 September 2001 LEADENHALL AUSTRALIA LTD & ORS v PEPTECH LTD Judgment 1 MEAGHER JA: This is an appeal against an order of Hunter J dismissing a claim made by the appellants for damages for misleading and deceptive statements made by the respondent Peptech Limited, in two of its public documents (viz. its Annual Report for the year ending 30 September 1996, and its half yearly reports for the period ending 31 March 1997). The plaintiffs (the current appellants) alleged breaches of s 1005 of the Corporations Law, ss 52 and 82 of the Trade Practices Act 1974 (Cth) and s 68 of the Fair Trading Act 1987 (NSW). 2 The central facts were not in issue. The statements sued on by the plaintiffs were false and misleading, and in a material respect. The falsity was unintentional. 3 In July 1997 the plaintiffs were minded to apply for an allotment of shares in the defendant (the current respondent). On 31 July such an application was made, and the allotment was apparently made on the same day. In making this application the plaintiffs relied on the public documents to which I have made reference. 4 Those public documents were misleading in that they omitted to mention the existence of 14,976,825 shares, which were "restricted shares" within the meaning of that expression in the listing rules of the Australian Stock Exchange Limited. These shares would not come out of escrow and be available for trading until about 6 September 1997. The restrictions on those arose out of the fact that they were issued to the holders of shares in a related United Kingdom corporation, in a deal whereby all 5,955 shares in the United Kingdom corporation were acquired by the issue of 2,515 shares in the respondent for every one share in the United Kingdom corporation. In many cases, the sudden release of a large number of shares (firstly out of escrow) on to the market can cause a serious depression in the market. 5 The appellants paid Peptech this $1,000,000 on 5 August 1997. 6 His Honour found as a fact that the appellants did not acquire actual knowledge of the existence of the escrowed shares until early December 1997. There can be no disputing his Honour's finding in this regard, of course, although it is remarkable, because the existence of the shares was alluded to in many reports and periodicals which came into the hands of Mr Lebbon, the guiding spirit of the appellants, who put himself forward as an expert in securities. He simply did not "jag" to them. 7 The appellants' allotment agreement, to which I have alluded, involved the appellants subscribing for 5,254,542 shares in Peptech at an issue price of 62 cents and Peptech agreeing to allot these shares and to grant options to the appellants to acquire an equal number of shares at an exercise price of 62 cents, and a further 1,313,635 shares at an exercise price of 1 dollar. The acquisition price of these shares was payable as to $1,000,000 by 5 August 1997, and as to the balance of $2,257,816 by 1 September 1997. The options were exercisable up to 25 June 2002, with complicated provisions for adjustment of the purchase price. 8 At the time of the agreement (31 July 1997) the shares were trading on the Stock Exchange at a figure of considerably less than 62 cents. Shortly after the agreement, however, the share price began tumbling, and continued to do so for some months. It fell as low as 26 cents. It continually recovered, and had reached 81 cents at some point before the appellants filed their statement of claim. Nobody (least of all the Stock Exchange) knows the reason for this aberrant behaviour. 9 One thing, however, is clear. At all material times, Mr Lebbon, who was the principal of the appellants, had great faith in the future of Peptech. He considered the shares underpriced, and anticipated (correctly, as it turned out) that they would rise. He was told that the company would soon be listed on the London Stock Exchange, and was soon to receive bullish reports from a Dr Story, a veterinary specialist, and also from Ord Minnett, stockbrokers, which confirmed his optimism. 10 So great was his optimism that, one day before the agreement, his companies entered into an agreement to "on-sell" certain of his soon-to-be acquired shares to an unknown investor from Western Australia, by whom he would be paid $1,000,000. (However, this investor's interest was not sustained, as he pulled out by 12 August 1997.) 11 The appellants did not meet their obligations to make timely payments under the allotment agreement, and by 1 September 1997 had paid no more than the initial $1,000,000. The parties then entered into another agreement (called by his Honour "the substitution agreement") whereby they granted mutual releases from their respective obligations under the allotment agreement, and Peptech agreed to allot to the appellants 1,612,903 shares in consideration of the $1,000,000 already paid. It also granted the appellants 1,612,903 options at an exercisable price of 62 cents, and 403,225 options at an exercise price of 1 dollar, in each case on the same terms and conditions as the options granted under the previous agreement. 12 His Honour analysed carefully the sales of shares in Peptech, which took place between July and December 1997, and came to the conclusion that none of the general slide in share prices could be attributed either to the escrowed shares being released or to any market anticipation of such a release. The appellants did not seek to challenge that conclusion. 13 It might also be noted that all the factors which induced Mr Lebbon to conclude in July 1997 that the shares were underpriced still continued to exist in December 1998. 14 This is the background to their actions seeking damages which came before Hunter J. His Honour said: "I think the correct conclusion to be drawn from Lebbon's evidence is that he would not have abandoned negotiations with Peptech had he been aware, prior to the allotment agreement, of the existence of the restricted shares and their impending listing". And his Honour also said: "As earlier stated, I am not satisfied that Leadenhall would not have entered into an allotment agreement had it known of the existence of the restricted shares. I am satisfied that an allotment agreement, possibly of a modified form, would have been negotiated and, further, that losses sustained by the plaintiffs were of a kind that would have ensued regardless of the existence of the restricted shares and of their release from escrow. There may have been a reduced consideration negotiated for the shares and options under such an agreement. However no attempt has been made to quantify any such reduced consideration. In my view, Lebbon's August 1997 presentation to prospective investors would indicate that any reduction would not have been significant". 15 I cannot see how his Honour can be said to have erred in reaching that conclusion. The plaintiffs' case at trial was what was called a "no transaction at all" case, i.e. the plaintiffs were advancing the proposition that if they had known of the existence of the escrowed shares before 31 July 1997 they would have terminated the negotiation; if they had found out the truth shortly after that date they would have rescinded the transaction. This position was maintained in the appellants' written submissions to this Court. But such a case is contrary to Mr Lebbon's own evidence: he said that if he had found out he would have "waited", not that he would have walked away from the transaction. He said this not once, but many times. He did not condescend to inform the Court what he would have done when he finished "waiting", nor how long that process would take, not what he was waiting for. Most importantly, he did not say what he would have done once he realised the fact, found by the judge, that the release of the escrowed shares had no effect on the price of the company's shares. 16 As I have said, I can see no reason why his Honour can be said to have fallen into error. Indeed, to the contrary. If a plaintiff asks a Court to award him damages he must lead whatever evidence he can assemble as to the quantum of those damages. If authority were needed for such an elementary proposition, it can be found in the High Court decisions of Marks v GIO (1998) 196 CLR 494 and Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1. 17 The appeal should be dismissed with costs. 18 HANDLEY JA: I agree with the reasons for judgment of Meagher JA and Giles JA and with the orders they propose. 19 GILES JA: It was found that the respondent had engaged in misleading or deceptive conduct, in that it had failed to disclose in its annual report for the year ended 30 September 1996 and in its half yearly report for the period ending 31 March 1997 that some of its issued shares could not be traded until a future date. It was found that the status of the shares was material to a decision to acquire shares and options in the respondent, and that the appellants had relied on the reports in acquiring shares and options. It was found, however, that the appellants had not suffered loss or damage by the misleading or deceptive conduct, and so that their claim against the respondent failed. The appellants appealed against the last-mentioned finding. The reports and the restricted securities 20 The respondent was engaged in the research and development of peptides, with a view to identifying and marketing peptide-based human pharmaceutical products and veterinary products. Its shares were listed on the Australian Stock Exchange. 21 The annual report stated, under the heading "Share Capital" - "(b) Issued and paid-up 134,157,197 (1995 - 107,763,975) ordinary shares of 50¢ each 179,995 (1995 – 179,995) ordinary shares of 50¢ each paid to 1¢" 22 The half yearly report stated, under the heading "Issued and Quoted Securities at End of Current Period" - Par Value Paid-Up Category of securities Number Issued Number Quoted (cents) Value (cents) 50¢ 18 3 Ordinary Securities 134,157,197 134,157,197 50¢ 179,995 50¢ 1¢ 18 4 Issued during current period 50¢ 23 The respondent had held 75 per cent of the issued shares in Peptech (UK) Ltd. In August 1996 it had acquired the remaining 25 per cent of the issued shares in Peptech (UK) Ltd, the acquisition being disclosed in the annual report in the terms - "(iv) In August 1996 an issue of 14,976,825 shares at 54¢ per share was made in consideration for 5,955 fully paid ordinary shares in Peptech (UK) Limited." 24 The 14,976,825 shares had been issued to the various shareholders subject to restriction agreements, under which the shareholders could not dispose of the shares or agree to dispose of them during escrow periods of one year from the dates of the agreements. The escrow periods expired in the few days before and on 6 September 1997. 25 It was common ground that the 14,976,825 shares fell within the definition of "restricted securities" in the Australian Stock Exchange's listing rule 19.12, and that conformity with chapter 9 of the listing rules meant that they could not be traded during the escrow periods. By listing rule 4.10.14 the annual report should have disclosed the number of restricted securities on issue and the date from which they ceased to be restricted securities. Listing rule 4.1 in relation to the half yearly report did not specifically require that disclosure. Both the annual report and the half yearly report, however, stated the total number of fully paid-up issued shares, 134,157,197, without disclosure of the status of the 14,976,825 shares part of that number. It was not suggested that this was other than an innocent mistake. The allotment agreements 26 The appellants were companies under the control of Mr Timothy Lebbon. The first appellant Leadenhall Australia Ltd held a licence entitling it to carry on a securities business, and Mr Lebbon was well experienced in the securities industry. 27 In late May 1997 a stockbroker known to Mr Lebbon suggested that he consider the respondent as an investment opportunity. He investigated it in some depth. In the course of doing so he obtained copies of the annual report and the half yearly report. He had a number of discussions with the stockbroker and with representatives of the respondent, and engaged a Dr Michael Story to provide a scientific review of the respondent's technology. 28 Mr Lebbon decided to subscribe for shares in the respondent and take up options to subscribe for further shares, with a view to the first appellant placing or selling the shares with or to institutions or its clients and retaining the options. He gave evidence that his deliberations and calculations were "based on … all of the 134,157,197 issued ordinary shares being listed and quoted securities which were the same in all respects". 29 An allotment agreement was entered into between the first appellant and the respondent on 31 July 1997. The first appellant agreed to subscribe for 5,254,542 shares at an issue price of 62 cents, and the respondent agreed to allot those shares and to grant options to the first appellant to subscribe for an equal number of shares at an exercise price of 62 cents and a further 1,313,635 shares at an exercise price of $1. The subscription amount of $3,257,816 was payable as to $1,000,000 by 5 August 1997 and as to the balance by 1 September 1997, and the options were exercisable up to 25 June 2002 with provision for adjustment of the exercise prices by a formula designed to protect against dilution of the respondent's issued share capital during the first three years of the option period. 30 The first appellant paid the $1,000,000. It was unable to pay the further $2,257,816 by 1 September 1997. A second allotment agreement was entered into on 25 September 1997 in substitution for the first allotment agreement. The first allotment agreement was terminated. The respondent agreed to allot to the first appellant 1,612,903 shares in consideration of the payment of $1,000,000 made under the first allotment agreement, and to grant options to the first appellant to acquire an equal number of shares at an exercise price of 62 cents and a further 403,225 shares at an exercise price of $1. In effect, the first allotment agreement was scaled down to the level of the $1,000,000 already paid. 31 Mr Lebbon had earlier obtained what was described as a commitment from an investor client to take shares to the value of $1,000,000. On 25 September 1997 the second appellant Advent Investors Pty Ltd acquired from the first appellant the beneficial ownership of 900,000 of the shares allotted to it for a consideration of $414,000, and on the same day the third appellant Noble Investments Pty Ltd acquired from the first appellant the beneficial ownership of the options for a consideration of $233,871. Materiality and reliance 32 The trial judge accepted the materiality of the undisclosed status of the 14,976,825 shares - "The evidence reinforced a lesson in logic that if a very significant body of shareholders are legally precluded from trading in shares for a period of 12 months, the release from that restriction will inevitably carry with it the possibility that some, if not all, of those shareholders will visit their investment alternatives, included amongst which would be the option of disposing of their shares. I have no doubt that the fact of the restricted shares coming out of escrow at the very time that Leadenhall had fixed a pricing mechanism for the on-sale represented a risk to Leadenhall and one which a prudent investor would not ordinarily choose to undergo." 33 There was an issue over whether Mr Lebbon had been made aware of the restricted status of the shares through broker reports sent to him in late May 1997 or at meetings with representatives of the respondent in July 1997. The trial judge was not satisfied that he had been made aware. There was also an issue over the knowledge of the status of the shares acquired by Mr Lebbon as a result of announcements relating to the respondent received by him in early August 1997. The announcements included reference to the allotment of shares as consideration for the sale by the allottees of shares in Peptech (UK) Limited, followed by the statement "New shares are likely to be subject to escrow conditions as restricted securities". The trial judge found that Mr Lebbon paid "scant regard" to the announcements, and - " … that in August the reference to escrow shares in historical documents relating to Peptech 'didn't "jag" in (Lebbon's) mind' for the reason that the documents were received in a different context, namely for the preparation of material by Mak for Lebbon's August presentations". 34 As I have said, it was found that the appellants had relied on the reports in acquiring the shares and options. It is unnecessary to go further into the trial judge's reasons for the finding, which involved a detailed consideration of the evidence. The finding as to Mr Lebbon's awareness was challenged by the respondent on appeal by a notice of contention, but in the view I take it is not necessary to deal with that matter. The nature of the reliance, however, was critical to the finding that the appellants had not suffered loss or damage by the misleading or deceptive conduct. The appellant's case as to suffering loss or damage 35 In the statement of claim the appellants alleged that the first appellant "would not have entered into [the allotment agreements] had it known of the existence and terms of the Restricted Shares" (para 26), and that each of the second and third appellants "would not have [acquired the shares or options] had it known of the existence and terms of the Restricted Shares" (paras 31, 34). 36 The appellants then alleged the suffering of loss and damage as follows - "35. Leadenhall, Noble and Advent have suffered loss and damage by the conduct of the defendant. Particulars Summary of loss from Peptech investment as at 30 June 1998: Leadenhall Noble Advent Total $ $ $ $ Subscription cost 352,129 233,871 414,000 1,000,000 Less net proceeds from sale of shares 146,723 236,289 383,012 Less net proceeds from sale of options _________ 16,532 __________ 16,532 __________ _________ 205,406 217,339 177,711 600,456 Costs & expenses 256,576 256,576 Opportunity cost 75,111 34,907 40,338 150,356 _________ __________ _________ _________ 331,687 34,907 40,338 406,932 _________ __________ __________ _________ Net loss $537,093 $252,246 $218,049 $1,007,388 " _________ __________ __________ __________ 37 This allegation proceeded on the basis that the appellants would not have acquired the shares and options, in the case of the first appellant as contracting party with the respondent and in the case of the second and third appellants as contracting parties with the first appellant, had they (meaning Mr Lebbon) been aware of the status of the 14,976,825 shares. The "loss from Peptech investment" was the amount paid in consideration for the acquisition of the shares and options, less the proceeds of sale of the shares and options so acquired, plus costs and expenses and plus compensation for being unable to put the amount paid to some other profitable use. 38 The appellants' case as pleaded was that, absent the misleading or deceptive conduct, they would not have entered into any transaction or transactions of acquisition of shares or options with the respondent (in the case of the first appellant) or with the first appellant (in the case of the second and third appellants). It was not a case that, absent the misleading or deceptive conduct, they would have entered into some other transaction or transactions of acquisition of the shares and options, a transaction or transactions at a different price or different prices or otherwise on different terms. It was a "no transaction" case, not a "different transaction" case. 39 In his witness statement dated 4 February 1999, which he adopted when giving evidence as true and correct to the best of his knowledge and belief, Mr Lebbon took a no transaction position. He said - "103. Had I known on 31 July 1997 that some 11% of the issued ordinary shares of Peptech comprised restricted securities which could not be traded for twelve months after date of issue and were soon after the date of the First Agreement to be freed from restrictions and freely tradeable, I would not have entered into the First Agreement as it could be expected that those facts would have the effect of putting downward pressure on the price of the Peptech shares for some time before and after the date of lifting of the restriction on trading because of the apprehension or reality, or both, of the sale of quantities of shares following the lifting of the restriction. 104. Had I known on 25 September 1997 that at the date of the First Agreement some 11% of the issued ordinary shares of Peptech comprised restricted securities which could not be traded for twelve months after date of issue and were soon after the date of the First Agreement to be freed from restrictions and freely tradeable, which had not been disclosed to me, I would not have entered into the Second Agreement." 40 However, this position was not maintained in Mr Lebbon's cross-examination. 41 In the beginning Mr Lebbon took the same no transaction position - "Q. Can I suggest to you that if you had known of shares being held in escrow before you made the investment on 31 July, you also would have thought nothing of it. A. Absolutely not, I would not have done the investment; it would have been so fundamental to the transaction." 42 There was then further cross-examination about the significance to Mr Lebbon of the status of the 14,976,825 shares as restricted securities. The significance was "that if those restricted securities were released onto the market or some of them, that could have the effect of dampening the price". His attention was drawn to the evidence in his witness statement "that if you had known that there was [sic] restricted securities in Peptech you wouldn't have proceeded with this transaction", and the effect of the following cross-examination was in substance that the market price would take account of the dampening effect of a known future release from escrow of restricted securities and that the significance of the dampening effect depended on when the investor contemplated a sale of the investment. Hence, Mr Lebbon agreed, when shares will come out of escrow will influence the investor "as to what point they enter into a transaction" because "commercially you would wait … until that had occurred before you took a placement". With specific reference to options exercisable over a long period after the date on which the securities would come out of escrow, it affected the price at which one would take the options. 43 That led to the following evidence - "Q. You say, do you, that if you had known that there were restricted securities which might be released on to the market in late 1997 in Peptech that you would have bargained for some different option price, do you? A. If I had proceeded with the deal I would have looked at a different price, yes. Q. What work would you have done to try and work out what price would be appropriate? A. Good question. I'm not sure offhand. There would be a number of things I would have done, I think. HIS HONOUR: Q. One would have been to get Mr Story on the job? A. Yes, your Honour, but this issue then is not just about fundamental values, which is what Mr Story's report is about, it is about pricing mechanisms and how the market might react. My inclination --- Q. You are talking about the fact that Mr Story's exercise wouldn't know the results of it? A. Certainly if I had proceeded with the transaction or contemplation of the transaction I would still have had a report done, but my initial reaction would be that I would not have done the transaction at that point of time. I would have waited to see the effects of this for the price to have weakened and then negotiated something. … SIMPKINS: Q. If immediately prior to entry into the allotment agreement you had been told that there were shares, namely the vendor's securities issued upon the acquisition of Peptech UK which were held in escrow which would be released in September 1997, you say, do you, that would have influenced your decision in relation to the options? A. Yes. Q. By reference to the price you would have been prepared to pay for the options? A. And by reference to whether or not I would have gone ahead with the deal full stop. … SIMPKINS: Q. What you say you would have wanted the opportunity to do is to have the advantage of seeing whether any of the shares held in escrow were placed on to the market? A. I would have wanted to see what the effect on the share price was, whether those shares, those escrow shares were dealt through the market or placed out through others or whatever." 44 A little later Mr Lebbon's evidence went - "Q. You now understand, you say, for the first time after the events that the shares were held in escrow and came available to be listed and sold on market in early September of 1997? A. I now understand that the shares became available for listing on 22 September, yes. Q. Your concern, you say, is that if you had known of that fact you would have wished to observe how the market behaved for a period of some months after that? A. For a period of time before and after that, yes. Q. What's the relevance of the period of time before? A. To see if the – if something is going to take place on a certain date sometimes there is a softening before that and then there is a softening after it and it restores itself. It depends on the stock as to whether the U starts here and goes here or starts before and goes out. One would look at the market dynamics. Q. You contemplated, did you, that if this circumstance was known to the market, that is, that there were restricted securities being released from escrow conditions in September 1997, that for some period of time prior to that date the market would react adversely to that news by depressing the price? A. Depending on the stock. Each stock is different. It is not unusual for a stock to exhibit some weakness immediately prior and to exhibit a weakness immediately after for a period of time. It does vary from stock to stock as to the length of time and how much before and after that occurs. HIS HONOUR: Q. And it would depend on who held the restricted shares too, I would have thought? A. And the quantum of them, how quickly they sold, the manner in which they sold. Q. The intention of the holders? A. It is a fairly complex set of issues you deal with. There's no precise answer, which is why you would wait until the effects were known. This was a transaction where there was risk involved and significant risk, and I was putting in a significant amount of money of my own, that had I been aware of the risks I would have waited. You know the saying you can go broke making a profit, but nobody went broke not doing a deal. I would have waited. … Q. But if you had not known, I want to come to some communications which suggest you did know, but if you had not known that there were restricted securities but were informed immediately before the allotment agreement that there were, you say, do you, that you would have forgone the opportunity to enter into this arrangement and deferred reflecting upon it for some number of months to wait and see what the market did? A. In hindsight, if you asked me that question what would I have done, I believe I would have waited. Q. And you would have waited because you didn't believe that the market was aware that there were shares held in escrow; is that right? A. No, I would have waited because I would have seen the risk in the transaction being increased dramatically." 45 These passages show a transition from not going ahead with the particular transaction at the time to either going ahead with a different transaction or transactions but looking at a different price or more likely waiting to see what happened when the 14,976,825 shares could be traded after the expiry of the escrow periods. That left open that there would have been a different transaction or different transactions, either in July-August 1997 or later in 1997. Mr Lebbon did not give evidence that he would not have gone ahead with any transaction in the knowledge of the status of the 14,976,825 shares and in the state of the market later in 1997. But he did not give any evidence of a transaction or transactions he would or might have gone ahead with or sought to go ahead with in the knowledge of the status of the 14,976,825 shares and in the state of the market later in 1997. The trial judge's findings 46 The trial judge found - "Had Lebbon been aware of the existence of the restricted shares and of their terms of restrictions I do not accept that he would have abandoned negotiations, given the favourable evaluation of Peptech's potential by Story. I do accept that he would have deferred concluding negotiations." 47 He explained and repeated that finding. He considered that it was not inevitable, or even a matter of probability, that the impending release of the restricted securities from escrow would adversely affect the respondent's share price, and that the possibility of disposal of the restricted securities in the weeks following their release from escrow, resulting in a depressed market price, "may have said little about the underlying value of the shares to a prospective long term investor: particularly one taking a position with long term options over shares in Peptech". After referring to Mr Lebbon's initial evidence that he "would not have done the investment", he said that he had difficulty in accepting that evidence at face value in the light of his findings as to the market significance of the existence of the restricted shares and of their release from escrow, and that the evidence lay uncomfortably beside other evidence of Mr Lebbon in cross-examination. He referred to evidence in Mr Lebbon's cross-examination part of that set out earlier in these reasons, and said that the correct conclusion to be drawn from Mr Lebbon's evidence was "that he would not have abandoned negotiations with Peptech, had he been aware, prior to the allotment agreement, of the existence of the restricted shares and their impending listing". 48 The trial judge later expressed the finding as a finding that - " … had he known of the existence of the restricted shares, Lebbon would have deferred concluding negotiations until a later assessment could have been made of the likely effect of the existence or release from escrow of the restricted shares on the Peptech share price". 49 So the question arose, would there have been a different transaction or different transactions later in 1997? The trial judge continued - "I also take the view that Leadenhall would have proceeded with the allotment in one form or another having regard to the height of Lebbon's expectations in relation to Peptech's future share price. Based upon the Story analysis and Lebbon's own workings he had formed the opinion that the net worth of Peptech was in the order of $260,000,000 which reflected a potential value per share of between $1.90 to $2.00. It is of particular significance, in my view, that, in the second half of August 1997, he was still of the opinion that there was a "huge upside" in prospect with Peptech's share price." 50 After detailing Mr Lebbon's presentation on behalf of the first appellant to prospective investors in the second half of August 1997, involving the huge upside to which he had referred, he said - "If Lebbon is to be taken as honestly presenting the Peptech case in the second half of August 1997, which I accept his presentation represented, it leaves little room for speculation when it comes to deciding whether Lebbon would have proceeded with the allotment had he been aware of the existence of the restricted shares. When it is recalled that by mid-August 1997 the Peptech share price had fallen significantly, the implication is strong that Lebbon had not been deterred by that market setback and had been prompted to describe the share price, being at an historical low, as an incentive to investment in Peptech." 51 The trial judge then referred to what happened after the release from escrow of 14,976,825 shares. There had been fluctuation and an overall deterioration in the prices at which shares in the respondent traded over the period July-November 1997. However, having regard to the numbers of shares traded and when they were traded during the period, his Honour doubted if any movement in the share price during those months could be attributed either to the existence of the shares coming out of escrow or to the disposal of any of those shares in the market. In short, on making an assessment of the likely effect of the existence or release from escrow of the shares, Mr Lebbon would not have been dissuaded from his opinion, an opinion held despite the fall in the market price of shares in the respondent for other reasons. 52 That left the question, what different transaction or transactions would there have been later in 1997? The trial judge said - "As earlier stated, I am not satisfied that Leadenhall would not have entered into an allotment agreement had it known of the existence of the restricted shares. I am satisfied that an allotment agreement, possibly of a modified form, would have been negotiated and, further, that losses sustained by the plaintiffs were of a kind that would have ensued regardless of the existence of the restricted shares and of their release from escrow. There may have been a reduced consideration negotiated for the shares and options under such an agreement. However no attempt has been made to quantify any such reduced consideration. In my view, Lebbon's August 1997 presentation to prospective investors would indicate that any reduction would not have been significant. … Once it is concluded in these proceedings that Leadenhall would have deferred concluding negotiations and negotiated an allotment agreement at a later time, the losses claimed by the plaintiffs fall into a category of losses that would have been incurred regardless of the existence of the restricted shares: save only the extent to which there may have been a reduced consideration agreed upon. In my view, there is no basis upon which a finding could be made as to the amount of any such reduced consideration other than by having regard to the glowing post 14 August 1997 presentation by Lebbon of Peptech as an investment opportunity. On that basis I think one is entitled to conclude that any reduction in consideration would not have been significant. It is for these reasons that, in my view, Leadenhall's case fails and, with it, the respective cases of Advent and Noble. It was not submitted otherwise." 53 54 The appellants' submissions to the trial judge had scarcely accommodated the shift in the evidence of Mr Lebbon and the possibility of findings as in fact made. Their written submissions put before the trial judge were made available to us. So far as presently relevant they asserted, in the section dealing with causation, that Mr Lebbon would not have proceeded "at that point", in context meaning in July 1997, but "would have waited until that was out of the way", meaning the release of the shares from escrow, and that "Had he been aware of the risks he would have waited". But they said nothing about what Mr Lebbon would have done at the end of the waiting, and put forward a calculation of losses differently laid out but the same in approach and figures as that alleged in the statement of claim. It was not suggested that any different approach was take by the appellants in oral submissions to the trial judge. The appellants' case on damages was still a no transaction case although, on the evidence of Mr Lebbon and the appellants' own submissions on the facts, it should have been a different transaction case. Discussion 55 Damages to compensate for loss or damage suffered by misleading or deceptive conduct will not necessarily be assessed in the same way as damages for breach of contract or the tort of deceit will be assessed (Marks v GIO Australia Holdings Ltd) (1998) 196 CLR 494 at 503, 510, 529, 549). The respondent had unsuccessfully submitted to the trial judge that the damages should be assessed in accordance with Potts v Miller (1940) 64 CLR 282. It urged the same course on appeal by a notice of contention, but again in the view I take it is not necessary to deal with that matter. 56 The trial judge correctly saw the case, on the findings he had made, as a different transaction case. On the facts as found, in order to establish the suffering of loss or damage it was necessary to determine what different transaction or different transactions would have been entered into, and then to compare the positions in which the appellants would have been in had they entered into that transaction or those transactions with the positions which they in fact came to be in (see for example Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13; Marks v GIO Australia Holdings Ltd at 504, 512). It was incumbent on the appellants to lead evidence on which that exercise could be carried out. 57 In their written submissions on appeal the appellants submitted that - (a) it was not open to the trial judge to find that the appellants would later have proceeded with an allotment agreement in modified form, because - (i) it was not put to Mr Lebbon that he would have so acted; (ii) that proposition was not the subject of any submission by any party at the trial; and (iii) there was no evidence from the respondent that the respondent would have so proceeded, particularly at a lower price; (b) the trial judge should have found that the appellants would not have proceeded at all and should have determined the matter on that basis; and (c) If it was open to find, as the trial judge did, that the appellants would have proceeded with an allotment agreement in modified form, the substance and effect of what the trial judge did was to find damage and then decline to embark on an assessment of it. 58 The submissions were supported and amplified in oral argument. I do not think they should be accepted. 59 As to (a)(i), in a different transaction case it was for the appellants to establish what different transaction or transactions would have been entered into. Proof of a past hypothetical fact has its own difficulties, and depending on the circumstances the extent and nature of the evidence required may not be exacting: an approach akin to that discussed in Apollo Shower Screens Pty Ltd v Building or Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 565-6 may be warranted. But such a task is well known in the law. It is involved in assessment of past economic loss in an everyday personal injury case, and in a commercial context in any claim for loss as a result of acting on negligent advice or lack of advice: hence, for example, the discussion of proof of causation in Daniels v Anderson (1995) 37 NSWLR 438 at 528-30. 60 It was not for the respondent to put to Mr Lebbon that he would later have proceed with an allotment agreement in modified form, and it was sufficient for it to negate the position that he would not have gone ahead with the transaction at all. The respondent did put to Mr Lebbon that he would have waited to see what the market did, which clearly flagged for the appellants the question of what would then have happened, and I consider that it was open to the trial judge to address the findings I have described. Indeed, in the manner the appellants put their case it might have been sufficient for him to have held that they had not made out a no transaction case, or to have held that they had failed to provide evidence on an essential element of a different transaction case without making a positive finding that the different transaction would not have been for a materially reduced consideration. 61 As to (a)(ii), the proposition was the subject of submissions by the respondent at the trial. The respondent's written submissions included that the existence of the restricted securities were "not determinative to a decision to invest or the timing of it" and that Mr Lebbon "would have made the same deal he in fact made in September", and in relation to damages that no loss had occurred in relation to investigation because "the investment would have proceeded in any event". Its oral submissions in relation to damages included - "Can I put the very general proposition at the outset that in deciding what the damages might be your Honour needs to form a view as to whether or not there would have been an acquisition of Peptech shares in any event and if there would have been an acquisition of Peptech shares in any event when that would have secured and on what terms. The onus is on the plaintiffs to prove that they are worse off through entering this transaction that they otherwise would have been so it is the plaintiff's onus to prove no transaction or a different transaction. The totality of Mr Lebbon's evidence doesn't support a no transaction analysis. He says he would have waited. He doesn't say that he would not have done a deal. If he had waited then your Honour would need to reflect on when he would have done a deal and when that deal was done on what terms it would have been done. The short point is that the plaintiffs have not demonstrated that whatever other deal might have been done would have been on any terms more favourable than the deal in fact done in September of 1997. This is really the point I put to your Honour in discussion this morning." 62 As to (a)(iii), as part of establishing what different transaction or transactions would have been entered into it was open to the appellants to have endeavoured to show that the respondent would have entered into the transaction or transactions. There was evidence that the respondent was anxious to obtain funds, including as share capital. If, as the appellants urged for other purposes in the appeal, the decreased trading price of shares in the respondent made acquisition of shares in the respondent an unwise investment choice, it could also be urged that the respondent would willingly have issued shares and options at the price and exercise prices in fact agreed. Interrogatories could have been administered. Dr Aston, the representative of the respondent with whom Mr Lebbon principally negotiated, gave evidence, and could have been cross-examined about what the respondents might have done. None of this occurred. Whatever these possibilities, however, absence of evidence from the respondent did not preclude the trial judge from addressing the findings I have described. 63 As to (b), the appellants had the task of overturning the trial judge's contrary findings. The finding that Mr Lebbon would have deferred concluding negotiations was thoroughly open on the evidence. The finding that Mr Lebbon would have negotiated an allotment agreement at a later time was, in the manner the parties fought the case, less well endowed with direct evidence, but in my opinion was also well open. 64 The appellants argued on appeal that "the only factual finding available on the evidence was that Lebbon would not have committed the appellants to any agreement at all". They said that it was self-evident that Mr Lebbon would not have proceeded at the same price and exercise prices when the trading price of shares in the respondent had significantly fallen, particularly when it was intended that the shares be on-sold to investors through the first appellant; further, that a company with an option to take the respondent's products had not exercised the option, a listing on the London Stock Exchange had not come to fruition, and the position of a financial director was vacant. All these, they said, made investment an impossible decision. 65 The withdrawal of the option holder did not occur until October 1997, and Mr Lebbon was confident of an imminent listing with a consequential increase in the share price and that the vacant position would be filled. In August 1997, when the trading price of shares in the respondent had significantly fallen, he was extolling their virtues to investors as shares with a potential value greatly in excess of the share price and option exercise prices under the allotment agreements and a prospective huge upside. In the face of Mr Lebbon's own view of the worth of the respondent, the appellants' submission can only be regarded as extreme. Further, the appellants had the opportunity to lead evidence from Mr Lebbon to the effect that, had he known the status of the 14,076,825 shares, he would not have been prepared in late 1997 to pay the share price and option exercise prices in the allotment agreements, but there was no such evidence and an inference in their favour should not be drawn (see Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418). In my opinion the trial judge's findings have not been successfully impugned, and should stand. 66 As to (c) the appellants argued that, having accepted the possibility of a reduced consideration, the trial judge could and should have arrived at a reduced consideration and from there quantified the loss or damage suffered. They said that he was in error in saying that there was no basis for a finding that the consideration in the different transaction would not have been for a significantly reduced consideration, but that even insignificantly reduced consideration meant some loss or damage. 67 In my view this misapprehends the trial judge's finding. In referring to no significantly reduced consideration he meant a reduced consideration of sufficient materiality to warrant compensation – in effect, that there was no reason to conclude that the consideration would have been different. But even if this be incorrect, the appellants simply failed to lead evidence on which the comparative exercise earlier mentioned could be carried out to a monetary figure. 68 According to one argument on appeal, a reduced consideration could have been found by reasoning that in July 1997 Mr Lebbon was willing to acquire shares at a premium of 20 per cent above the then trading price, and in late 1997 he would have been willing to acquire shares at a premium of 20 per cent above the then (lower) trading price: so the reduced consideration could be calculated. It was acknowledged that this argument had not been put to the trial judge, and the appellants can hardly be heard to complain that the trial judge did not reason in the manner suggested. In any event in my opinion the reasoning is too simplistic, and of course Mr Lebbon did not give evidence to that effect. The first appellant entered into the second allotment agreement without any adjustment reflecting the then lower trading price of shares in the respondent, albeit that it may have been constrained in negotiating a reduced price and reduced exercise prices because in default under the first allotment agreement, but more important Mr Lebbon was taking a long-term view of investment in the respondent with regard to what he perceived as a true worth of the respondent greatly in excess of the price at which its shares were trading. A proportionate reduction would be speculation at best, and there was no other basis for finding a reduced consideration. 69 Another way of assessing damages may have been advanced in submissions in reply. It was that "delay and subsequent agreement on the same terms means damage because Lebbbon would have held on to his money in the interim instead of buying shares which plummeted immediately". This is taken from a written submission, and was not developed orally. It appears to have been an argument for compensation for the loss of use of money paid at the beginning of August 1997 until the time when the subsequent agreement on the same terms would have been made, although the reference to plummeting rather confuses the thrust of the argument. This argument also does not seem to have been put to the trial judge. We were not referred to anything enabling compensation to be assessed on this basis. If it was another way of assessing damages, I do not think the appellants should be permitted to advance the argument. 70 Yet another way of assessing damages was advanced in a supplementary written submission delivered with the consent of the respondent after the hearing had concluded. It was that the opportunity of waiting and later negotiating for a possibly lower price had been lost, and that the commercial opportunity had a value which could be assessed as in cases such as Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 and Sellers v Adelaide Petroleum NL (1994) 179 CLR 332. It is sufficient to say that suffering loss or damage in this way was not pleaded, not the subject of evidence, and not put to the trial judge. Again, the appellants should not be permitted to advance it. 71 In my opinion, the appeal should be dismissed with costs. _______________ DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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